Diligence key to avoiding bad debt

empty wallet

A jump in the number of businesses entering external administration should serve as a warning to SMBs about the importance of doing research before taking on new customers, says a leading credit management expert.

According to ASIC figures, the number of businesses entering external administration in the 2011-12 year was up 9.4 percent over the 2010-11 financial year.

CreditorWatch managing director Colin Porter said data collected by his own business suggests a 22.5 percent rise in defaults in 2012, with construction/building, retail, hospitality and printing sectors the hardest hit.

Porter said what’s more worrying is that the value of defaults is also growing, with the average dollar amount of each default registered rising 18.5 percent. This was even more marked in the final three months of the last financial year, with Q4 2011/2012 up 22 percent on Q4 2010/2011.

“June represented the highest number of defaults registered, plus the highest dollar value of the defaults on record,” he added.

Bad debt can be make or break for a small business, which is why Porter urges small businesses to do their research before taking on new customers, or increasing their exposure to existing ones.

“Although it’s hard in the current climate, it’s important that you don’t just provide credit to anyone. Do your research, it doesn’t have to be time-consuming or expensive, there are simple yet inexpensive steps that can save you money in the long-term, such as checking them on a payment default registry,” he said.

With this in mind, Porter has the following three tips for how to vet customers effectively:

1.   Obtain the entity’s correct name and ABN/ACN, and verify that the ABN/ACN is active and is still legally operating.

2.   Check to see whether the business has had court judgments or payment defaults against them in the last two years. CreditorWatch can help with this.

3.   Although trade references are often unreliable, they should still form part of your due diligence process. One key step is to seek a trade reference from a supplier of a similar product to that which you provide.

“At the beginning of any relationship, there’s a honeymoon period, and the same goes in business. This means it’s important for you to continue to monitor all your customers. CreditorWatch members are able to put all clients on a credit file watch list, where they’ll be alerted if adverse data appears on their file,” he said.

“This can be an early warning that the honeymoon, is over,” Porter added.